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This week's SA articlesSelected posts on SA this week (basically, the ones about MLPs that aren’t named ET, EPD and the like). Royalty companies: DMLP – May 28 post by Elephant Analytics (Investing Group Leader), Buy rating at $ 28.50 but he doesn’t own any; 13 comments, 13 likes. EA has 2-part posts about royalty companies; first, he tries to estimate the current year’s distribution based on current prices and estimated production levels, and second, he tries to put a fair value on the company using long-term estimates for energy prices. EA had previously estimated that DMLP’s Q1 distribution (paid in May) would be 80 – 85 cents. It turned out to be 99 cents because production was far ahead of his estimates. Q1 production was 25% ahead of the Q4 numbers and 50% ahead of the Q3 numbers. EA is now increasing his estimate for the 2023 distribution – he thinks DMLP can pay 80 cents per quarter. And at $ 75 oil/$ 3.75 natural gas, he has a $ 32 price target. Me – EA doesn’t mention this, so I will. DMLP’s distribution is based on cash flows, and frequently it has catch-up royalty receipts for production in prior periods. That is, the operator estimates the production and pays DMLP on a current basis based on that estimate. Then, a few months later, the operator trues up its production number and makes a catch-up payment to DMLP. Usually, those catch up payments are fairly small and consistent, but in Q1 the catch up for NPI royalties amounted to 69% of the total receipts for the quarter. The catch-up was also high in Q4 but not this high. I have no idea why this is happening, but I don’t think we can rely on DMLP regularly getting those large catch-ups. FWIW. DMLP – May 31 post by Douglas McKenny (nothing to ell on SA), Buy rating but he doesn’t own any; 18 comments, 8 likes. Simplistic overview of DMLP based on 10-K numbers. DMLP has outperformed its peers (Mr. McKenny uses VNOM and KRP) by a significant margin. It has also outperformed the wider energy industry by a large margin. DMLP does not share any operating costs risks and other than buying royalty interests, it has no cap expense or debt. Its gross margins are very high, debt is nonextistent, and its distribution is covered by free cash flow. So Buy some. KRP – May 28 post by Elephant Analytics, Buy rating but he doesn’t own any; 5 comments, 8 likes. KRP just made an acquisition of land at a great price. The deal should grow KRP’s distributable cash flow per unit by 20%. The problem is that the production on the new property is likely to start declining in 2 or 3 years, which is why KRP was able to get the land so cheaply. The article has a discussion of the new property and why production is peaking. EA thinks KRP will be able to pay out 34 cents per Q for the balance of 2023 (that’s 32 cents for Q2 and 36 cents for Q3 and Q4). EA has a $ 19 price target based on $ 75 oil and $ 3.75 natural gas. Me – I used to own KRP but decided that the top 4 managers are obscenely overpaid. I used the sales proceeds to buy some BSM and some more DMLP, if anyone cares. NRP – June 3 post by Francesco Infusino (nothing to sell), Strong Buy rating at $ 46.20 but he doesn’t own any; no comments, 2 likes. This was posted on Saturday but I’m including it because I own NRP, it’s mostly a royalty company, and like it. Mr. Infusino is another business student that recently started posting on SA (this happens so often that I wonder if business courses now include a requirement to get something posted on SA). He doesn’t get a high grade from me on this post. I’m not sure he understands that NRP’s basic operations involve collecting royalties on coal production. He says “NRP uses sophisticated mining methods and detailed geological studies to extract minerals in a cost- and environmentally-conscious way.” Actually, NRP doesn’t do any mining or extraction. He then talks up the distribution and says the company “consistently rewards shareholders with a steady long-term income”. Actually, the distribution has been cut multiple times and the units themselves underwent a 1-for-10 reverse split in 2016. Then, he likes NRP’s P/E ratio which is 3.4X. And finally, he does a discounted cash flow valuation, which he doesn’t explain, and concludes that NRP’s FMV is $ 69, about 50% higher than where it trades today. No discussion of coal issues, met coal prices, the SIRE soda ash mine. I should have skipped this one. Me – If anyone here owns NRP, you will know that one of the big issues facing the company is the potential dilution that might result from the preferred unit conversion or the exercise of warrants that were issued in connection with the preferred unit issuance. NRP was able to cash out about 20% of the preferreds in Q1 at face, which was a nice surprise to me. About 2 weeks ago, they announced that another 17% of the remaining preferreds are being cashed out at face. They have the cash to do this and I think it is very positive for the common unitholders. OTOH, coal prices have dropped a lot this year, which will ding NRP’s royalties. But since it only trades at a very low multiple of earnings or cash flows, I think it is still a bargain. I think the value of NRP’s interest in SIRE’s soda ash mine is about the same as NRP’s entire market cap. And the acreage (mostly coal royalties for now, but also carbon sequestration and other uses) less the net debt and preferreds is worth a lot even if you put a 5-year expiration date on the coal. The continuing Carl Icahn/Hindenburg saga regarding IEP: IEP – May 30 post by Pinxter Analytics (nothing to sell), Strong Buy rating at $ 21 and he owns some; 240 comments, 54 likes. Very simple thesis – IEP has tanked 60% since the Hindenburg short report came out and it now yields 40%. Mr. Icahn seems intent on maintaining the distribution, and a 40% yield makes up for a lot of IEP’s shortcomings. That’s about it. For example, if you buy $ 1,000 worth of IEP today and the company maintains its distribution, your investment will be worth $ 2 million in only 20 years. I stopped reading at that point. If I’m still alive at that time, I’ll check how this bet went. IEP – June 1 post by BlackFish (nothing to sell), Hold rating; 106 comments, 12 likes. This is BF’s 6th post on SA. He has no use for IEP common units because they could eliminate the distribution at any time. But he also says not to short it because Mr. Icahn could offer to buy out the public holders at any time and that could cause a short squeeze. He likes the 2026 bonds, yielding 11.3% and thinks IEP might sell one of its investments just to prove the company’s value, and that would secure the bond’s value; maybe IEP would even call them. The rest of this article is a bunch of suggestions for Mr. Icahn as to what he might do to boost IEP’s value. I doubt Carl reads SA looking for suggestions. Miscellaneous stuff: AB – May 31 post by Jishan Sidhu (nothing to sell), Strong Buy rating but he doesn’t own any; 10 comments, 2 likes. Mr. Sidhu is a Canadian business student who started posting on SA in January (with 1 earlier post). He’s been posting a lot recently. AB is an MLP that provides investment services; it operates thru an underlying partnership and EQH controls both the partnership and AB. Lots of overview stuff here, not so much discussion about operations or the issues facing AB (which I own). He compares its multiples to AB’s peers and fids that it is cheap. He does a discounted cash flow valuation and finds AB is worth $ 43 (the current price is $ 34). Then he quotes something called Alpha Spread, which has a base case valuation of $ 134 for the company. Somehow he averages those 2 targets and comes to a $ 49 target. I don’t think Mr. Sidhu knows that AB is a variable distribution payer because he lists a potential distribution cut among the risks – AB is paying out more than its EPS. GLP – June 2 post by Stephen Nemo (nothing to sell), Buy rating at $ 30.21 but he doesn’t own any; 11 comments, 2 likes. Mr. Nemo last wrote about GLP before the pandemic and he was a Hold at that time. GLP has returned 115% since then and now he upgrades to a Buy, but I’m not sure why, based on what he says. He says GLP has just about zero tangible book value (I can see 2 problems with his analysis, but they offset each other) so it’s a risky bet. And he thinks the company’s interest coverage ratio is also low, adding to the risk. But he likes the distribution coverage ratio (he uses a very generous definition of distributable cash flow that does not reflect any cap ex at all) and the fact that the company has been recycling assets (buys and sells) so that it doesn’t have to rely on the debt markets quite as much as it has in the past. I think his analysis is wrong in that regard as well. No comments about the gas station business as being attractive or not. I really don’t get his Buy rating based on what he wrote. And speaking oif gasoline distributors, Anthony Garcia (nothing to sell) posted about SUN on June 2; Buy rating at $ 44 and he owns some; 4 comments, 4 likes. An overall review of SUN and I’ll only mention 1 thing because I have never heard this before. SUN has 4 transmix facilities. Transmix is an unusable mixture of gasoline, diesel,and jet fuel that no longer meets the sepcs of any of the original fules. Transmix is considered waste. But SUN’s transmix facilities can reprocess this waste fuel into usable products. Mr. Garcia makes a big deal about this operation. Otherwise: 1. Mr. Garcia keeps focusing on revenue, like the EV/revenue multiple. No idea why, since the per-gallon margin is much more important than the gross revenue. 2. The leverage ratio is only 3.1X EBITDA and that’s low. 3. They just raised the distribution slightly and said they would review it again in Q1 of 2024. So the current 7.8% yield is likely to increase, long-term. 4. And he has some strange reasons for thinking SUN is sort of protected against any recession.
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Msg # | Subject | Author | Recs | Date Posted |
142135 | Re: This week's SA articles | MikeyHorse | 1 | 6/3/2023 5:47:53 PM |